Recovery from bad credit: 1st steps

Get back on track by negotiating with creditors

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Dear Opening Credits,
I'm trying to get my life back on track, but the reality is I got so far behind with credit card bills, school, life, etc., I kind of let everything go. Now I have a good paying job and want to start paying things back and put my credit back on track. I'm in collections for all my major credit cards and it's been more than a few months. At this point does it matter if I settle or pay the balance in full? I can do either, but it's just going to take a bit longer if I pay in full. I'm at the bottom of the pit. I just need to know what is better because I know this is going to be a process to get everything paid off, but I know it's time to get started.  
-- Jennifer


Dear Jennifer,
You may feel you're just beginning the journey toward recovery from bad credit, but trust me -- you're more than halfway to your goal. How so? You have the desire to overcome past indiscretions, the means to fix them and a couple of great options for resolution. Here's what I think you should do. 

The first thing is to find out if the credit card issuers have sold the accounts to collection agencies yet. You say you're a few months behind, but typically issuers will hang on to the debts until you've been delinquent for about about six months. They may be in the issuer's internal collections department.

Give each company a call to find out if your accounts are still in their possession. I hope they are because then you will be dealing with friendly client service representatives rather than third-party collectors, who can be intimidating.

Your credit rating would also be in better shape if the issuer has not charged the account off. Yes, your credit reports are indicating at least a 30-, 60- or 90-day late payment notation, which doesn't look good, but if you start sending the expected payments (they'll tell you what that may be) now, you should be back on track soon. Explain that you'd like to repair relations and resume a timely payment schedule. Because your income is decent, it sounds as if you'll be able to do this. If you get nowhere with the card issuers, contact a credit counseling agency and see if you can get on a debt management plan. These nonprofit organizations have agreements with most credit card issuers and if you go on their plan, the interest rates on your debts might be lowered.

On the other hand, if your credit accounts have been sold to third-party companies, you'll have to deal with them directly. Collection agencies do not send information about installment payments to the credit bureaus, but they will update your reports after you satisfy the debt. You can do that either by paying in full or by arranging a settlement. I say go for the latter, if you can. You'll save money and it will have the same effect on your credit report and scores as the former.

Contact each collector and request a reduction on the bill. They bought the account for less than its true value, so find that sweet spot where the agency turns a profit and you get a financial break. This way you both win. Be reasonable with the negotiations, though. For example, if one of the debts is $2,000 and the agency recently acquired the account, they aren't going to accept $200. But $1,500, sent right away? They certainly may bite that bait. Do be aware though, that forgiven debt may be taxable, since the IRS usually considers it income.

Whichever direction you turn, I promise your credit reports and scores will recover. If the cards are still open, you can begin to use them again in a way that will add positive data to your files. As the months turn into years, whatever mistakes you made will fade into the background until they disappear forever. In the foreground will be a representation of what you really are: a responsible woman who knows how to charge like a pro.

See related: Next steps if your settlement offer to a debt collector is rejected

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Updated: 01-16-2019